The True Cost Of A Home, Sweet Home

Buying a home is often celebrated as one of life's most significant milestones—a true "adulting" moment. But while the excitement of finding that perfect property is understandable, many first-time buyers may not fully grasp the true cost of home ownership. The reality is, it's not just about the purchase price.

For many Indians, buying a home is a dream realised with the help of a home loan. In fact, a 2023 report by the National Housing Bank reveals that over 90% of residential property buyers in India rely on loans to finance their purchases. As Santosh Joseph, founder of Germinate Investor Services LLP., aptly puts it: "Taking a loan to buy a residential property is one of the wisest things one can do, as it leverages a tool to build an asset with the potential to appreciate over time."

However, as many soon realise, the purchase price is just the tip of the iceberg.

Consider the case of the Sharma family, who recently purchased a three-bedroom apartment in Mumbai. Like many others, they initially focused on the purchase price, but soon found themselves facing a slew of additional expenses.

From legal fees to renovation costs, the Sharmas discovered that the true cost of home ownership was far higher than their estimates.

So, what are these additional costs?

According to surveys by property consultants Anarock, Knight Frank, and Housing.com, legal fees typically account for about 0.75% of the property’s cost, while brokerage fees in major Indian cities can range from 1% to 1.5%.

Additionally, stamp duty and registration costs can be as high as 6% of the property's value, and the average processing fee for home loans is around 0.5% to 1% of the loan amount.

Many properties, especially in urban areas, are sold as bare shells or with minimal finishing. Renovating these spaces to make them livable can add an additional 20–25% to the cost of the property.

In cities like Mumbai and Bengaluru, renovation costs can even reach as high as 30% of the property's value, according to Housing.com. According to Knight Frank’s report, an average Indian homeowner spends about 10–15% of the property’s value on renovations every seven to 10 years.

But the costs don't stop there. Once you've moved in, ongoing expenses such as property taxes, maintenance fees and repairs become a regular part of your budget.

Knight Frank estimates that annual maintenance and repair costs can range from 0.5% to 1% of the property’s value, making it crucial for homeowners to account for these recurring expenses.

Perhaps the most significant hidden cost of home ownership is the interest paid on a home loan. Most buyers finance their purchase with a mortgage, and the interest can dramatically increase the overall cost of the property.

For instance, the Sharma family took out a Rs 50-lakh loan at an 8% interest rate for 20 years. By the end of the loan term, the total repayment amount, including interest, could exceed Rs 1 crore. In this scenario, the interest component alone nearly doubles the cost of the property.

According to Knight Frank, when you factor in interest, legal fees, and ongoing maintenance, the total cost of home ownership in India can exceed the initial purchase price by up to 40–50% over 15–20 years. This is a sobering realisation for many first-time buyers.

So, how does this impact the return on investment? When calculating ROI, it's crucial to consider all associated costs, including maintenance, renovations, and interest payments.

A study by the National Real Estate Development Council suggests that these additional costs can reduce the effective ROI by 1–2%.

To put this into perspective, imagine you purchase a property for Rs 1 crore with an expected annual appreciation of 5%. If you spend Rs 1–2 lakh annually on maintenance, this reduces your effective ROI by 1–2% each year.

Over 20 years, this can significantly impact your overall returns, especially when combined with other costs like property taxes and home improvements.

In the end, while real estate can be a rewarding investment, it's essential to go in with your eyes wide open. By considering all the additional expenses—interest payments, maintenance, taxes, and more—you gain a clearer picture of your true ROI. As Santosh Joseph notes: "Everything is a cost, and at some level, it will eat up into the value."